Mercury Insurance 2012 Annual Report Download - page 29

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8
Investment Portfolio
The following table presents the composition of the Company’s total investment portfolio:
December 31,
2012 2011 2010
Cost(1) Fair Value Cost(1) Fair Value Cost(1) Fair Value
(Amounts in thousands)
Taxable bonds $ 253,175 $ 265,671 $ 166,295 $ 180,257 $ 200,468 $ 223,017
Tax-exempt state and municipal bonds 2,017,728 2,142,683 2,179,325 2,265,332 2,417,188 2,429,263
Total fixed maturities 2,270,903 2,408,354 2,345,620 2,445,589 2,617,656 2,652,280
Equity securities 475,959 477,088 388,417 380,388 336,757 359,606
Short-term investments 294,607 294,653 236,433 236,444 143,378 143,371
Total investments $ 3,041,469 $ 3,180,095 $ 2,970,470 $ 3,062,421 $ 3,097,791 $ 3,155,257
__________
(1) Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost.
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, 2012, 67.4% of the Company’s total investment portfolio at fair value and 89.0% 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 12.2 years (11.0 years including all short-term instruments)
at December 31, 2012, 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 3.7 years (3.3 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 3.1 years (2.8 years including
all short-term instruments) at December 31, 2012, including collateralized mortgage obligations with a modified duration of 3.2
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, 91.7%
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.