Mercury Insurance 2011 Annual Report Download - page 29

Download and view the complete annual report

Please find page 29 of the 2011 Mercury Insurance annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 136

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136

The Company applies the fair value option to all fixed maturity and equity securities and short-term
investments at the time the eligible item is first recognized. For more detailed discussion, see “Liquidity and
Capital Resources—Invested Assets” in “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and Note 2 of Notes to Consolidated Financial Statements.
At December 31, 2011, 74.0% of the Company’s total investment portfolio at fair value and 92.6% of its
total fixed maturity investments at fair value were invested in tax-exempt state and municipal bonds. For more
detailed information including credit ratings, see “Liquidity and Capital Resources—Portfolio Composition” in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The nominal average maturity of the overall bond portfolio was 11.8 years (10.8 years including all short-
term instruments) at December 31, 2011, and is heavily weighted in investment grade tax-exempt municipal
bonds. Fixed maturity investments purchased by the Company typically have call options attached, which further
reduce the duration of the asset as interest rates decline. The call-adjusted average maturity of the overall bond
portfolio was 4.5 years (4.1 years including all short-term instruments) 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 3.7 years (3.3 years including all short-term
instruments) at December 31, 2011, including collateralized mortgage obligations with a modified duration of 2.4
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 more sensitive the asset is to market interest rate fluctuations.
Equity holdings consist of non-redeemable preferred stocks, common stocks on which dividend income is
partially tax-sheltered by the 70% corporate dividend received deduction, and a partnership interest in a private
credit fund. At year end, 96.2% of short-term investments consisted of highly rated short-duration securities
redeemable on a daily or weekly basis. The Company does not have any direct equity investment in subprime
lenders.
Investment Results
The following table presents the investment results of the Company for the most recent five years:
Year Ended December 31,
2011 2010 2009 2008 2007
(Amounts in thousands)
Average invested assets at cost(1) ......... $3,004,588 $3,121,366 $3,196,944 $3,452,803 $3,468,399
Net investment income:
Before income taxes ............... 140,947 143,814 144,949 151,280 158,911
After income taxes ................ 124,708 128,888 130,070 133,721 137,777
Average annual yield on investments:
Before income taxes ............... 4.7% 4.6% 4.5% 4.4% 4.6%
After income taxes ................ 4.2% 4.1% 4.1% 3.9% 4.0%
Net realized investment gains (losses) after
income taxes(2)(3) .................... 37,958 37,108 225,189 (357,838) 13,525
Net increase in unrealized gains on
investments after income taxes(3) ....... $ — $ — $ — $ — $ 10,905
(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. 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.
9