Mercury Insurance 2011 Annual Report Download - page 70

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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 $179 million in 2012 to Mercury General. The Insurance
Companies paid Mercury General extraordinary dividends of $270 million and no ordinary dividends during
2011. As of December 31, 2011, Mercury General had approximately $76 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,
payment of debt, 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 $447.8 million at December 31, 2011, 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 or for 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 2011 was $158.5 million, an increase of $66.7 million over
2010. The increase was primarily due to the decreased payment of tax and operating expenses. The Company
reduced agent contingent commissions, consulting, advertising, and information technology expenditures in
2011. The Company utilized the cash provided by operating activities primarily for the payment of dividends to
its shareholders, the purchase and development of information technology, and the retirement of debt. Funds
derived from the sale, redemption or maturity of fixed maturity investments of $636.2 million were primarily
reinvested by the Company in high grade fixed maturity securities.
The following table presents the estimated fair value of fixed maturity securities at December 31, 2011 by
contractual maturity in the next five years.
Fixed Maturities
(Amounts in thousands)
Due in one year or less ............................................. $ 30,758
Due after one year through two years .................................. 81,386
Due after two years through three years ................................ 110,199
Due after three years through four years ............................... 65,407
Due after four years through five years ................................ 114,193
$401,943
See “D. Debt” for cash flow related to outstanding debts.
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