Mercury Insurance 2010 Annual Report Download - page 64

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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, 2010 and 2009, municipal securities included auction rate securities (“ARS”). The
Company owned $1.6 million and $3.3 million at fair value of ARS at December 31, 2010 and 2009,
respectively. ARS are valued based on a discounted cash flow model with certain inputs that are 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 $11.5
million and $14.0 million ($10.7 million and $13.2 million at amortized cost) of Alt-A mortgages at
December 31, 2010 and 2009, 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, 2010, the Company had no holdings in commercial
mortgage-backed securities.
The weighted-average rating of the Company’s Alt-A mortgage-backed securities is A- and the weighted-
average rating of the entire mortgage backed securities portfolio is AA as of December 31, 2010.
(3) Corporate Securities
Included in the fixed maturity securities are $95.2 million and $91.6 million of fixed rate corporate
securities, which have durations of 4.1 and 4.7 years, at December 31, 2010 and 2009, respectively. The
weighted-average rating is BBB+ for 2010 and A- for 2009.
(4) Collateralized Debt Obligations
Included in fixed maturities securities are collateralized debt obligations of $55.7 million and $47.5 million,
which represent approximately 1.8% and 1.5% of the total investment portfolio and have durations of 2.0 years
and 2.9 years, at December 31, 2010 and 2009, respectively.
Equity Securities
Equity holdings consist of non-redeemable preferred stocks and common stocks on which dividend income
is partially tax-sheltered by the 70% corporate dividend received deduction. The net gains due to changes in fair
value of the Company’s equity portfolio were $45.7 million. The primary cause of the gains in the Company’s
equity securities was the overall improvement in the equity markets. The Company’s large holdings of energy
related stocks also experienced growth in value during 2010, in excess of the 12.8% growth in the S&P 500
Index.
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