Mercury Insurance 2011 Annual Report Download - page 71

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C. Invested Assets
Portfolio Composition
An important component of the Company’s financial results is the return on its investment portfolio. The
Company’s investment strategy emphasizes safety of principal and consistent income generation, within a total
return framework. The investment strategy has historically focused on maximizing after-tax yield with a primary
emphasis on maintaining a well diversified, investment grade, fixed income portfolio to support the underlying
liabilities and achieve return on capital and profitable growth. The Company believes that investment yield is
maximized by selecting assets that perform favorably on a long-term basis and by disposing of certain assets to
enhance after-tax yield and minimize the potential effect of downgrades and defaults. The Company continues to
believe that this strategy maintains the optimal investment performance necessary to sustain investment income
over time. The Company’s portfolio management approach utilizes a market risk and consistent asset allocation
strategy as the primary basis for the allocation of interest sensitive, liquid and credit assets as well as for
determining overall below investment grade exposure and diversification requirements. Within the ranges set by
the asset allocation strategy, tactical investment decisions are made in consideration of prevailing market
conditions.
The following table presents the composition of the total investment portfolio of the Company at
December 31, 2011:
Cost(1) Fair Value
(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds and agencies ................................... $ 14,097 $ 14,298
States, municipalities and political subdivisions ........................... 2,186,259 2,271,275
Mortgage-backed securities .......................................... 33,008 37,371
Corporate securities ................................................. 73,009 75,142
Collateralized debt obligations ........................................ 39,247 47,503
2,345,620 2,445,589
Equity securities:
Common stock:
Public utilities ................................................. 22,969 26,342
Banks, trusts and insurance companies .............................. 17,495 16,027
Industrial and other ............................................. 326,135 316,592
Non-redeemable preferred stock ....................................... 11,818 11,419
Partnership interest in a private credit fund .............................. 10,000 10,008
388,417 380,388
Short-term investments .................................................. 236,433 236,444
Total investments .............................................. $2,970,470 $3,062,421
(1) Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at
cost.
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. Equity
holdings consist of non-redeemable preferred stocks, dividend-bearing 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 December 31, 2011, 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 investment in
subprime lenders.
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