Mercury Insurance 2011 Annual Report Download - page 77

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CONTRACTUAL OBLIGATIONS
The Company’s significant contractual obligations at December 31, 2011 are summarized as follows:
Contractual Obligations Total 2012 2013 2014 2015 2016 Thereafter
(Amounts in thousands)
Debt (including interest)(1) . . . $ 143,547 $ 1,651 $ 1,010 $ 886 $140,000 $ — $ —
Lease obligations(2) ........ 39,027 15,821 10,551 5,410 3,185 2,436 1,624
Losses and loss adjustment
expenses(3) ............. 985,279 577,669 238,197 106,036 38,187 25,190 —
Total Contractual
Obligations ........ $1,167,853 $595,141 $249,758 $112,332 $181,372 $27,626 $1,624
(1) The Company’s debt contains various terms, conditions and covenants which, if violated by the Company,
would result in a default and could result in the acceleration of the Company’s payment obligations.
Amounts differ from the balance presented on the consolidated balance sheets as of December 31, 2011
because the debt amounts above include interest.
(2) The Company is obligated under various non-cancellable lease agreements providing for office space,
automobiles, and office equipment that expire at various dates through the year 2019.
(3) Reserve for losses and loss adjustment expenses is an estimate of amounts necessary to settle all outstanding
claims, including IBNR as of December 31, 2011. The Company has estimated the timing of these payments
based on its historical experience and expectation of future payment patterns. However, the timing of these
payments may vary significantly from the amounts shown above. The ultimate cost of losses may vary
materially from recorded amounts which are the Company’s best estimates.
(4) The table excludes liabilities of $3.6 million related to uncertainty in tax settlements as the Company is
unable to reasonably estimate the timing and amount of related future payments.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
The Company is subject to various market risk exposures primarily due to its investing and borrowing
activities. Primary market risk exposures are changes in interest rates, equity prices, and credit risk. Adverse
changes to these rates and prices may occur due to changes in the liquidity of a market, or to changes in market
perceptions of creditworthiness and risk tolerance. The following disclosure reflects estimates of future
performance and economic conditions. Actual results may differ.
Overview
The Company’s investment policies define the overall framework for managing market and investment
risks, including accountability and controls over risk management activities, and specify the investment limits
and strategies that are appropriate given the liquidity, surplus, product profile, and regulatory requirements of the
subsidiaries. Executive oversight of investment activities is conducted primarily through the Company’s
investment committee. The Company’s investment committee focuses on strategies to enhance after-tax yields,
mitigate market risks, and optimize capital to improve profitability and returns.
The Company manages exposures to market risk through the use of asset allocation, duration, and credit
ratings. Asset allocation limits place restrictions on the total funds that may be invested within an asset class.
Duration limits on the fixed maturities portfolio place restrictions on the amount of interest rate risk that may be
taken. Comprehensive day-to-day management of market risk within defined tolerance ranges occurs as portfolio
managers buy and sell within their respective markets based upon the acceptable boundaries established by
investment policies.
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