Mercury Insurance 2012 Annual Report Download - page 62

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41
Income tax expenses were $53.9 million and $30.2 million for the years ended December 31, 2011 and 2010, respectively.
The increase in income tax expense resulted from increased taxable income in 2011.
Investments
The following table presents the investment results of the Company:
2011 2010
(Amounts in thousands)
Average invested assets at cost(1) $ 3,004,588 $ 3,121,366
Net investment income:
Before income taxes $ 140,947 $ 143,814
After income taxes $ 124,708 $ 128,888
Average annual yield on investments:
Before income taxes 4.7% 4.6%
After income taxes 4.2% 4.1%
Net realized investment gains $ 58,397 $ 57,089
__________
(1) Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost. Average
invested assets at cost is based on the monthly amortized cost of the invested assets for each respective period.
Included in net income are net realized investment gains of $58.4 million and $57.1 million in 2011 and 2010, respectively.
Net realized investment gains include gains of $31.3 million and $46.6 million in 2011 and 2010, respectively, due to changes in
the fair value of total investments pursuant to the application of the fair value accounting option. The net gains during 2011 arise
from a $62.1 million increase in the market value of the Company’s fixed maturity securities offset by a $30.9 million decline in
the market value of the Company’s equity securities. The Company’s municipal bond holdings represent the majority of its fixed
maturity portfolio, which was positively affected by the overall municipal market improvement for 2011. The primary cause of
the losses on the Company’s equity securities was the overall decline in the equity markets occurring primarily in the third quarter
of 2011. The net gains during 2010 arise from $1.0 million and $45.7 million increases in the market value of the Company’s fixed
maturity and equity securities, respectively. The primary cause of the gains on the Company's equity securities for 2010 was the
overall improvement in the equity market.
Net Income
Net income was $191.2 million or $3.49 per diluted share and $152.2 million or $2.78 per diluted share in 2011 and 2010,
respectively. Diluted per share results were based on a weighted average of 54.8 million shares in 2011 and 2010. Basic per share
results were $3.49 and $2.78 in 2011 and 2010, respectively. Included in net income per share were net realized investment gains,
net of income taxes, of $0.69 and $0.68 per share (basic and diluted) in 2011 and 2010, respectively.
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 $155 million in 2013 to Mercury General. The Insurance Companies paid Mercury General ordinary
dividends of approximately $145 million during 2012. As of December 31, 2012, Mercury General had approximately $85 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