Mercury Insurance 2012 Annual Report Download - page 63

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42
after-tax income. With combined cash and short-term investments of $452.8 million at December 31, 2012, the Company believes
its cash flow from operations is adequate to satisfy its liquidity requirements without the forced sale of investments. Investment
maturities are also available to meet the Company's liquidity needs. 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 2012 was $148.1 million, a decrease of $10.5 million compared to 2011. The
decrease was primarily due to the increased payment of income taxes and losses and lower investment income as a result of the
lower interest rate environment, partially offset by increased premiums collected. The Company utilized the cash provided by
operating activities primarily for the payment of dividends to its shareholders. Funds derived from the sale, redemption or maturity
of fixed maturity investments of $668.7 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, 2012 by contractual
maturity in the next five years.
Fixed Maturity Securities
(Amounts in thousands)
Due in one year or less $ 79,344
Due after one year through two years 99,603
Due after two years through three years 68,617
Due after three years through four years 76,072
Due after four years through five years 88,350
$ 411,986
See “D. Debt” for cash flow related to outstanding debts.
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.